The neutrality of nominal rates: How long is the long run?

João Valle e Azevedo, João Ritto, Pedro Teles

Research output: Contribution to journalArticlepeer-review

Abstract

We revisit the empirical relationship between policy interest rates and inflation aimed at understanding the reasons for persistently low inflation in Japan and the euro area and why monetary policy has been unable to raise it. We document the long-run positive relationship between nominal rates and inflation across countries and across time. We also find that a permanent rise in nominal rates leads to an increase in inflation, also in the short run. These findings suggest that the low inflation outcomes are a result of policy rates being kept too low for too long.

Original languageEnglish
JournalInternational Economic Review
DOIs
Publication statusAccepted/In press - 18 May 2022

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